After Decades of War, Sri Lanka Bounces Back

As recently as a year and a half ago, life in Colombo was tense. Residents were under constant threat of suicide bombs, and armed guards at checkpoints made crossing the city a hassle. "You went out every day not knowing what would happen," recalls Richard Vokes, Asian Development Bank (ADB) country director. Since Sri Lankan government forces defeated the Tamil Tigers rebel group in May 2009, though, the sandbags and checkpoints are mostly gone, tourists stroll the palm-fringed seaside promenade, and locals fly kites in front of the majestic colonial-era Galle Face Hotel. Living in Colombo is now "a very pleasant experience," Vokes says.

The ADB expects Sri Lanka's economy to grow as much as 8 percent this year and next. Colombo's stock market is the world's second-best performer (after Mongolia) in 2010, more than doubling in value even as many investors wait to see whether the stability holds. Visits from foreigners have increased 40 percent so far this year and are expected to top 600,000 for 2010. The government hopes that number will hit 2.5 million by 2016 as word spreads about the white sand beaches, rainforests teeming with wildlife, and ancient temples nestled in the lush hillsides of the newly peaceful island nation. "Sri Lanka has been a closed shop for 30 years," says Joseph Michael Suresh Brito, chief executive officer of Colombo-based Aitken Spence Hotel Holdings, which is working with a Thai company on a $40 million community of luxury villas on the south coast. "People will come with no fear."

Tourism is one of three sectors the government is counting on to help reduce Sri Lanka's reliance on the garment trade and low-end manufacturing. At least a half-dozen resorts and hotels are in the works, including a $150 million property that Hong Kong-based Shangri-La is planning for Colombo's waterfront. IT outsourcing, another preferred sector, already employs 60,000 and is on track to bring in revenues of $350 million this year. By 2015 the government hopes outsourcing revenues will hit $1 billion. Agricultural exports, the government's third priority, grew 21 percent in the first eight months of the year, as farms that lay fallow during the conflict now yield rich crops of rice, lentils, and beans.

After decades of neglect and sabotage, Sri Lanka's roads, railways, and ports are ill-prepared for the growth. The government is planning billions of dollars in investment to upgrade dilapidated infrastructure, with much of the work going to multinationals. Korea's Hyundai Engineering and Construction is building a four-mile breakwater for a new container port in Colombo. Indian utility NTPC (NTPC) is close to a deal to build a $900 million coal-fired power plant on the east coast. And Swiss cement maker Holcim's Sri Lankan business is up 22 percent this year. "Being here at this moment is fantastic," says Stefan Huber, Sri Lanka CEO for Holcim. As in many other developing countries, China's influence is growing. A $455 million loan from China Eximbank paid for a 300-megawatt power plant scheduled to open next year, and an additional $560 million in loans from China will go toward new roads, including a 20-mile expressway to Colombo's airport. In the south, Chinese workers are wrapping up the first phase of a $1.4 billion port in the town of Hambantota. Nearby, a Chinese construction company is building Sri Lanka's second international airport at a cost of $210 million.

Many foreigners, though, have been slow to put their money on the line. In the first six months of 2010, Sri Lanka saw $208 million in foreign direct investment, down from $253 million in the first half last year. "There is a lot of renewed interest, but most of it is yet to be realized," says Nick Nicolaou, Sri Lanka chief for London-based bank HSBC (HBC). Some investors grouse that the Board of Investment, a government agency that must approve foreign-funded projects, makes it difficult to do business in the country. Says the board's chairman, Jayampathi Bandaranayake: "It's fair to say we could improve our services." He argues that as the board focuses on priority sectors, it will simplify the approval process and offer incentives to investors. "There's an expectation of big investments in tailor-made areas," says Bandaranayake.

One big worry is red tape and graft. Watchdog group Transparency International on Oct. 26 ranked Sri Lanka 91st out of 178 countries in terms of corruption. (No. 1 Denmark is the least corrupt country.) That put Sri Lanka one spot behind India, though well ahead of Vietnam (ranked 116). In July the European Union rescinded Sri Lanka's preferential trade access because of the country's human rights record.

Foreigners and Sri Lankans grumble privately about the growing power of President Mahinda Rajapaksa. After Rajapaksa was elected to a second term in January and his party swept parliamentary elections in April, Parliament lifted a two-term limit for the presidency. Three of Rajapaksa's brothers hold top government posts, and his 24-year-old son is in Parliament. "We haven't seen evidence of it yet, but if the family's power is used in the wrong way, then we have a big problem," says Mark Mobius, who has invested in Sri Lankan stocks and bonds as part of the $33 billion he manages for Franklin Templeton Investments.

Government officials say human rights issues are a top priority that Parliament is addressing. While they acknowledge that corruption is a problem, they insist it's no worse than in neighboring countries. The government, says presidential spokesman Lucien Rajakarunanayake, has "a commitment to minimize" corruption. Officials acknowledge that corruption is a problem, but businesspeople say it's no worse than in neighboring countries. And Rajapaksa's family, many people in business and government say, provides the stable leadership needed in the recovering country. "The Rajapaksa brothers seem powerful, but this issue didn't happen overnight," says Nirupama Rajapaksa, the president's cousin and a member of Parliament. "Our family has been in politics since 1931."

The bottom line: Sri Lanka is poised for rapid growth as its economy bounces back from decades of civil war.

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